Sunday, October 21, 2007
The collapse of the unofficial market has spread to dabba trading as well
The high volatility in the secondary market has brought trading in the grey market for yet-to-be-listed stocks to a grinding halt.
In the last couple of days, no grey market trades have taken place in Ahmedabad, the biggest such market in the country.
For some time now, investors have been trading unofficially in stocks even before the shares have been allotted to them. All high-profile initial public offers in the recent past, including that of real estate developer DLF, have seen a thriving pre-allotment grey market at work.
Companies such as Maytas Infrastructure, Reliance Power and Mundra Port, which are planning to come out with IPOs soon, too had seen active trading in the grey market.
Thanks to the recent volatility and loss of momentum in the stock market, the grey market is now uncertain over the performance of the IPOs. This has led to trading in the grey market coming to a halt.
Shares of Reliance Power had gained fancy in the grey market and a premium was quoted for the first time for an issue, which was yet to receive clearance from the market regulator.
However, on Tuesday and Wednesday, the premium was down to Rs 38-40 from the high of Rs 48 just few days ago. Since then, no trading has been taking place in the stock on the grey market.
Even an application form for Reliance Power shares worth Rs 100,000 was trading in the grey market for as high as Rs 5,800.
Such was the interest in the IPO of the company, which will apart from others also set up the 4,000 megawatt Sasan ultra mega power project, that investors were making such trades even before the application forms were printed. Such trading too has come to a complete halt now.
The collapse of the unofficial market has spread to dabba trading also — the unofficial market for listed shares. In a falling market, and especially when the fall is so huge as was witnessed in the last four trading days, such trading stops over worries that settlement could become a problem.
Maytas Infra, a Satyam group company, is expected to be listed next week on bourses. Mundra Port is also coming out with an IPO in the next few weeks, though the price band is yet to be announced.
Volatility was the name of the game last week and is likely to continue for the week ahead. From euphoric highs, markets came crumbling down like a pack of cards. They recovered sharply, but eventually tumbled again.
The Sensex began the week with a bang (up 640 points) on Monday. Panic selling on Wednesday, owing to the Sebi’s discussion paper on participatory notes, saw the index hit the lower circuit for the third time in the last three years. Certain clarifications, thereafter, saw the index recover and, in fact, the Sensex scaled a fresh all-time, intra-day high of 19,199, up 780 points for the week.
However, aggressive selling on Friday saw the index tumble to a low of 17,226, down 1,972 points from the peak. The Sensex finally ended the week with a loss of 4.7 per cent (859 points) at 17,560. The index has gained a whopping 30.2 per cent (4,228 points) in the previous eight weeks.
Last week, we had mentioned that while upside targets were difficult to set, one needed to keep a close eye on key support levels. The Sensex tested the support level of 17,300, bounced back sharply, but eventually broke it. Going forward, the index is likely to test the support of 17,000, below which the index may drop to 15,780.
The bias seems negative for the moment and any upmove is likely to face stiff resistance around 18,070-18,550 levels. This week, the index may face resistance around 18,300-18,550-18,780, while on the downside, the index may find support around 16,800-16,570-16,350.
The NSE Nifty moved in a wide range of 635 points. From a peak of 5,737, the index plunged to a low of 5,102, before settling with a loss of 3.9 per cent (213 points) at 5,215. The key level to watch out for the Nifty is 5,020, below which the index could drop to 4,780-4,600.
This week, the index is likely to face resistance around 5,455-5,530-5,610, while on the downside, the index may find support around 4,970-4,900-4,820.
India’s move against foreign speculators who exploit a loophole to buy domestic assets was clumsy, but not unexpected. Authorities cracked down on participatory notes (PNs), which have allowed foreigners to skirt investment curbs. PNs account for two-thirds of the country’s annual $75 billion (Rs2.99 trillion) capital inflows, which have caused the rupee to rise sharply. But India’s overheating problem is best solved by fiscal and monetary measures. Rather than tightening exchange controls, India should loosen them and allow its residents to invest freely abroad.
The problem of excessive capital inflows into an emerging market economy is serious. India’s response was measured. It removed a loophole that allowed anonymous foreign purchase of PNs, without the normal investor registration requirements. Foreign portfolio capital has driven the Indian stock markets to record levels and pushed the rupee up 12% against the dollar since January. With the country experiencing more than 7% inflation and significant real wage growth, competitiveness has suffered. Imports are up 31% from last year, against an 18% increase in exports.
The government controls foreign investment and traps domestic money within the local economy. Blocking Indians from investing abroad demonstrates that the local government still wants socialist-type controls over the lives and resources of its people. With reserves plentiful and the rupee strong, there is neither a moral nor an economic case for maintaining such restrictions.
India’s economy is clearly overheating. A rising rupee appears insufficient to lower inflation, yet it makes life difficult for India’s exporters. Inflation and excessive rupee rise are best fought through domestic policy measures. One is fiscal restraint; public spending in the current year is running 36% ahead of last year, a 29% real increase. The other is monetary tightening, forcing short-term interest rates above 10%—3% in real terms—from the current Reserve Bank repo rate of 7.75%.
That would deflate the Indian stock market, reduce the flow of hot money and alleviate the upward pressure on the rupee. That would solve India’s problems more effectively than putting more restrictions on foreign speculators.